When Is Debt Meaningful? Is It Possible For Everyone To Save?

"Neither a borrower nor lender be"
Shakespeare's quote reveals that he didn't think much of borrowing.  Is it better to be a borrower or a saver?  Financial planners often say that everyone should save at least 10% of their income and most people think that government deficits are bad.  Many people worry about the US indebtedness to China and the debts that Greece and Spain owe to Germany.  Would the world be better off if every country saved?  Would the world be better off if every person always saved at least 10% of their income? 
In short NO.  It is impossible for every country to simultaneously save money.  A country can only save money by loaning it to another country which is a debtor.  An individual who saves money is typically creating a borrower because when you save money in a bank account or other financial investment, your saving is a loan that the bank (or other investment) must pay back to you, so a dollar of savings becomes a dollar of debt.  Instead of lending your cash, you could save it in a jar buried in the yard, but if everyone did that, it would be akin to a simultaneous increase in the demand for money and a decrease in the supply of money which would cause deflation and recession.  Saving money without lending it does not increase real resources.  Saving is only a virtue for society when it is converted into physical investment.  For example, most people save money by lending it to a bank which makes money by lending it back out and many of those people are making physical investments in physical capital.   If there is only 10% more savings without 10% more physical investment, that means that everyone is buying 10% less.  And that would mean that everyone would earn 10% less because a dollar spent is a dollar earned.  That means that incomes would drop 10% and so consumption would drop more like 20% to only achieve a 10% increase in savings!  And when everyone tries to spend their jars of money, it will just mean inflation and an economic boom, but everyone would be better off if there were a more constant rate of savings because that would avoid a recession.
Normally savings means that someone else owes you.  Peter works 10% harder than Paul this year and loans Paul the money so that Paul can work 10% harder than Paul next year and pay him back.  The only way for both Peter and Paul to simultaneously save is for them to both stockpile physical goods that they create.  There is no way for everyone to save their services so that they work hard now and somebody else works hard for them later, but everyone can save the physical products of their labor (goods) and enjoy them later.  That is the only way for everyone to simultaneously save, but that is not called savings.  That is called (physical) investment in macroeconomics.  Saving is a virtue only when it increases investment. 

Suppose the US has no foreign debts.  If the US has high amounts of internal debt, that should not be a problem because it is impossible for the US to have net debt if it has no foreign debt.  Each dollar owed creates a debtor and a saver and the two balance each other out.  Government debt is the same way.  If the government owes a large amount of money to private American citizens, then that means that American citizens have a large amount of savings!  No problem.  Many people think that government debt is burdening the country, but if so, then the government could just declare default tomorrow and wipe out all debt.  This was called jubilee in the Bible.  All debts were simply wiped out in Biblical times at regular intervals (every 7 or 49 years) by Jewish law.  But that would not make America any richer because we would still have the same real resources (nature, infrastructure, capital, and labor) as we had before.  Only the distribution of financial claims on real resources would have shifted dramatically.  The distribution of ownership of wealth does not matter except as an incentive for everyone to work, save and invest.  This is why a government default would be harmful.  It would create financial chaos as savers who thought they were rich suddenly become poorer and taxpayers who had been debtors, suddenly have their debts forgiven.  But within a couple years, the chaos would resolved and growth should continue based upon the real resources (real wealth) that was there all along.

The US also has foreign debt, but that is even easier to solve because US foreign debt is mostly denominated in dollars.  The US is the world's best producer of dollars and we can print them very cheaply.  The US could pay off all the foreign debt with newly printed dollars tomorrow.  That would cause a temporary increase in inflation, but if foreign debt were a big problem, then inflation would be a small price to pay.  Unexpected inflation is also just a transfer of financial resources from savers to debtors and it would further reduce America's debt load by reducing the real value of existing debt. 

In any case, although the US is the world's largest debtor nation in the amount of debt that we owe foreigners, our foreign assets earn high returns whereas the debt we own foreigners is mostly Treasuries (government debt) with very low (negative real) rates of return.  Many of US foreign assets are foreign subsidiaries of US corporations which have very high earning rates.  Thus, the US has higher earnings on our foreign assets than foreigners earn on their US assets:

Krugman expounds:

Suppose that for some reason the nation temporarily ends up being ruled by a guy who is driven mad by power, and decrees that... everyone will receive a large allotment of newly printed government bonds, adding up to 500 percent of GDP.  The government is now deeply in debt — but the nation has not directly gotten any poorer: the public, ...now owes 500 percent of GDP, but the public, in its role as investors, now owns new assets equal to 500 percent of GDP. It’s a wash.
So where’s the problem? Well, to pay interest on that debt, the government will have to raise a lot more revenue. Again, this is a wash — the extra revenue is matched by the extra income people receive as bondholders. But tax rates will have to go way up; ...this means that marginal tax rates will have to go way up.
And ...very high marginal tax rates act as a disincentive to productive activity. So real GDP may well fall significantly.
This is what I mean when I say that the burden of debt is about incentives, not about having to deliver resources to other people.

And national debt is not a burden on children.  My debt would be a burden on my children if our laws required children to pay off their parents' debts (like some countries have done), but my children would be paying somebody else's children who would benefit from my debt.  Dean Baker:

As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Bill Gates’ children may own all the debt — but that is within generations, not between generations. As a group, our children’s well-being will be determined by the productivity of the economy (which Brooks complained about earlier), the state of the physical and social infrastructure and the environment.
One can make the point that much of the debt is owned by foreigners, but this is a result of our trade deficit, which is in turn caused by the over-valued dollar.*

Our real burden on our children (or benefit) is the real capital, natural resources, and infrastructure we leave them.  If we destroy our natural environment, that will give them a real burden, but government debt will benefit American children who own the government bonds and hurt the American children who must repay them.  That is a wash unless the payment reduces their incentives to work because some children will pay too much taxes to want to work and other children will have too much inheritance to need to work.  In that case, a bought of inflation might be a good way to help reduce the real value of the debt and bring back the incentives to work. 

So why not just have zero taxes and borrow all government revenues?  Well, who would lend money to such a government?  The market will not lend money to a government that has no way to repay the loans.  Even a government with a poor plan for repayment would face an extremely high market interest rate and that would reduce the scope for profitable public projects because the cost of a highway would include an enormous interest bill.  Furthermore, excessive government borrowing would crowd-out private borrowing too and that would reduce private investment.  Government should borrow when that is a cheaper way to finance expenditures and it should tax when that is the cheaper way.  Right now, borrowing is cheaper than taxing because the 10-year bond has a negative real interest rate and with 20% unemployment in construction, infrastructure is cheaper to build than usual.  But we are cutting infrastructure spending instead of increasing it. 

*The trade deficit exactly equals net borrowing from foreigners.  It could be reduced by looser monetary policy which would help reduce the value of the dollar.